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Unlocking Growth Potential: Strategies, Policies, Actions

 

A Country Economic Memorandum

Summary

Kosovo’s economic growth in the past decade has been solid, yet, with a gross domestic product (GDP) per capita of €1,760, the country remains one of the poorest in Europe. Following the end of the conflict, output was growing at double-digit rates, driven by the donor-funded reconstruction efforts. Since 2005, annual growth has decelerated to below 5 percent. However, the other countries in Southeast Europe have been growing faster, so the income gap has widened. Kosovo‘s economy would need to more than double its growth rate to 10 percent per annum over the next decade to reach Albania‘s income level (assuming Albania‘s economy continues to grow at 5.5 percent annually over this period). To reach Montenegro‘s current GDP per capita level of about €5,700, the economy would have to grow at 12 percent per annum for an entire decade. At the same time, Kosovo has the weakest employment track record in Europe: the unemployment rate has reached 48 percent and the employment rate is extremely low (26 percent). Consequently, poverty remains persistent and widespread (though shallow) with 45 percent of the population estimated to consume less than the national poverty line, while 17 percent are extremely poor.

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Full Report[1.9MB]
Annex[176 KB]
Report Overview (in Albanian)[2.3MB]
1.Strategic And Macroeconomic Setting

Kosovo has a population of about 2 million, and, with a gross domestic product (GDP) per capita of €1,760, is one of the poorest countries in Europe. Poverty remains persistent and widespread, though shallow3, with 45 percent of the population estimated to be living below the national poverty line, while 17 percent are extremely poor, according to latest available data4. With a 48 percent unemployment rate and a very low employment rate (26 percent), Kosovo has the weakest employment track record in Europe5. However, Kosovo‘s economy is characterized by a large informal sector, which implies a slightly higher employment than the official record. Nonetheless, unemployment is very high by regional standards. Moreover, the economy remains largely dependent on remittances and donor aid.
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2. Tenhancing Prospects For Private Sector Led Growth

Kosovo’s growth since 1999 has been solid, but driven mostly by international aid and the public sector, as well as by remittances. In the first years following the conflict, reconstruction efforts were the main economic activity. As these investments diminished, private sector growth began only slowly to emerge. In recent years, relatively high growth rates have been maintained by substantial increases in public spending, especially on capital projects; however, the current outlook does not leave much hope that these sources of growth can sustain or increase the growth rates achieved so far. Donor funding is expected to diminish and public resources will remain limited. In the future, sustainable and faster economic growth will depend on more active engagement with the private sector, both domestic and foreign.
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3. The Role Of Transport And Trade Facilitation In Imprving Export Performance In Kosovo
Kosovo’s economy is small, even in regional terms, and long-term growth prospects will strongly depend on developing its export potential. In an increasingly globalized world, success in export markets is increasingly affected by the ability of governments to support an environment that promotes efficient and low-cost trade services and logistics. The overall objective for the development of the transport and logistics sectors can be described as the need to reduce what can be termed as the ―economic distance‖ to the main markets. A crucial component of this process is trade facilitation, or, lowering trade transaction costs, which include all costs related to the moving of goods from the factory to the final destination abroad.
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4. Improving Labor Market Outcomes In Kosovo
Despite rapid economic growth after the conflict, Kosovo displays persistently high rates of unemployment, the highest in the region. Although all groups in the working-age population display poor employment outcomes, youth and women outcomes are particularly acute. The high share of idle human capital in Kosovo is an unused economic resource, while at the same time condemns many people to poverty and destitution. This chapter examines the challenges in the labor market in Kosovo, beginning with a detailed analysis of Kosovo‘s labor market and the identification of the key factors behind the poor labor market outcomes. Policy options and recommendations are then presented to address these challenges.
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5. The Role Of Migration And Remittances
Migration for Kosovars has been a tradition for many decades, and Kosovo is among the countries with greatest migration in Europe (and in the world).48 In the 1990s, outmigration accelerated because of the hardships of the war, and culminated in 1999 when hundreds of thousands Kosovars had to leave. However, the resolution of the conflict a decade ago does not seem to have provided incentives for the migrants to return (apart from those that were sent back by host countries providing temporary refuge). Migration has provided a safety valve for large part of the population, providing a source of livelihood in an environment of very high unemployment and poverty rates. Remittances have also provided a safety net, helping households diversify their livelihood strategies. For most of the poorest families, remittances represent over 70 percent of their income.
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6. The Role Of Agriculture For Stimulation Emplyment and Growth
The natural resource endowments of Kosovo, its young labor force, and its proximity and free access to the EU market suggest that Kosovo has the potential to boost its agricultural production and exports. These comparative advantages can benefit farmers, if they receive market signals and if local supply chains are efficient enough for the farmers to be competitive in regional markets. But since the 1990s, the agri-food sector has suffered from a breakdown in supply chains and there are significant obstacles to increasing productivity. Problems in the agri-food sector and economic upheaval in general, have crippled the rural economy. With diminishing opportunities and falling incomes, Kosovar agriculture has become an economic activity of last resort, providing a critical source of income. The lack of opportunities and falling incomes are the reason behind the very large number of small and subsistence farms in much of Kosovo and the surrounding region.
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Related Links
Multimedia

Interview with Borko Handjiski: Unlocking Growth Potential in Kosovo




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